Published: Business Line, 17 December 2004

By Pradeep S Mehta

The proposal to set up a steel regulator is mainly in response to the lobby of the builders who face a double-whammy due to the moves of both the cement and the steel industry. The way forward is not a steel regulator, but to move the agenda for establishing the Competition Commission of India at the earliest.

THE proposal by the Steel Minister, Mr Ram Vilas Paswan, to set up a steel regulator is ludicrous, to say the least. Nowhere in the world, there is a regulator for a commodity or a product, or for that matter in the steel sector.

Independent regulation is usually the form adopted only for the service sector, for several reasons which are not akin to goods sector.

The only exception is perhaps coal, which has to be treated under the rubric of energy.

Market distortions in any goods sector are best pre-empted or regulated by a combination of trade and industrial policy instruments to be used by the government branch administering the sector or through action by a competition authority.

In the case of India, it is the Steel Ministry that is required to pre-empt the anti-competitive situation through policy responses, such as by strategically lowering tariffs or encouraging more production.

Even encouraging substitution can balance the demand, such as the use of plastic or aluminium or concrete structures instead of steel. Second, by ensuring that the industrial policy governing the complex steel sector is managed in such a manner that there is better industrial democracy and distortions checked.

Lastly, as a large amount of production is in the public sector, the Government can intervene directly by policy directions to SAIL, a big player in India.

SAIL has a market share of 30.8 per cent of the total capacity in India. And if prices need to be regulated, the Essential Commodities Act can also be used.

Surprisingly, the public sector steel units are in league with the private sector. The new association: the Indian Steel Alliance, can also behave like a cartel, if not already doing so.

If that has to be looked into then it is the Monopolies and Restrictive Trade Practices Commission, but that is currently facing a sunset. The new competition authority is in a limbo.

Steel is one product which has been addressed in a research project: “Functional Competition Policy for India” being implemented by CUTS under the guidance of renowned economic, legal and business experts in India.

Various other goods and services sectors are also being examined to see how anti-competitive practices harm our economy.

Steel is quite a heterogenous product industry. It comprises thousands of products varying in shape and chemistry with distinctly different applications as also technology of production.

The steel market is fragmented and the demand is highly price inelastic. Integrated steel mills are capital intensive, infrastructure- and basic mineral-dependent. The smaller ones are not so, and are dependent on scrap or intermediate products produced elsewhere, not withstanding the import of war scrap, which has occupied newspaper columns recently.

Intra-industry competition is complex due to merchant operations where a buyer of an intermediate product can compete with the mill producing that in the market for the finished product.

The pricing issues relating to the intermediate product has been the bone of contention where the producers of the same are being accused of adopting unfair means to squeeze the merchant mills.

Producers of hot-rolled coils (HRCs) who also make downstream products like cold rolled coils and galvanised plain and corrugated sheets etc. resort to discriminatory pricing maintaining low differential between HRC and CRC, and even on other downstream products.

If the price differential between these products is lower than the cost of conversion of HRC into downstream products for a merchant mill, its entire economics goes for a six.

This is a common and tactical pricing policy followed normally by integrated mills to prevent excess competition in their downstream products market and also excessive capacity build up in the merchant mill sector.

The intra – industry issues of this kind have attracted greater attention in recent times.

The government has been sensitive to the ultimate consumers of steel by taking proactive action to arrest price jumps. In the past, the government had also taken highly protective measures to protect the interests of the steel makers. For example, the merchant mills producing CRC, GP/GC and even steel tubes have, in fact, been hurt by what they describe as undue protection provided to the HRC manufacturers by high import duty, non-tariff import barriers like floor prices, etc.

The Government was doing so to prevent a financial downturn for the HRC producers in the face of a global crisis in the industry, especially considering the fact that these facilities require huge capital investment and employ large number of workers.

So much for the background. The current demand for a steel regulator has been mainly made by the Builders Association of India (BAI). In the past, it had dealt with the cement cartel in more imaginative ways. First, by boycotting and, second, by lobbying for lower tariffs. In the case of steel, another basic input for construction, the BAI has argued the need for regulation to control runaway inflation in steel prices. In June, they demonstrated that steel prices have nearly doubled, from Rs 14,000 a tonne in January 2003 to Rs 27,000 in May 2004.

The BAI stated that there is no mismatch in demand and supply, nor a steep increase in inputs, and hence this price increase doesn’t make any sense. It demanded that the government should prevent steel manufacturers from forming cartels and exploiting the market.

On the other hand, another victim, the Cold Rolled Steel Manufacturers Association, argued against a regulator on the lines of what I have stated above. Their advocacy was to use trade policy measures to curb the price gouging by the steel manufacturers: reduce import duties on intermediate products such as HR coils and billets up to 5 per cent.

On billets, which are a basic re-rollable steel material, the duty reduction will help the local downstream steel industry to be able to produce HR coils, as there is a surplus capacity in both long- and flat-finished steel goods.

Mr Paswan’s reaction is mainly in response to the lobby of the builders who face a double-whammy due to the shenanigans of both the cement and the steel industry.

The way forward is not a steel regulator, but to move the agenda for establishing the Competition Commission of India at the earliest. Then, to provide the Commission with human and financial resources to deal with the problem.

Unfortunately, the agenda is in a limbo, on a ridiculous issue of choosing between a retired judge or a retired bureaucrat as its head. Better than either would be a competent person who can cope with the rigours of taming a marketplace.